The first time filing taxes for small business owners can be overwhelming. Make your first time filing business taxes run smoothly by understanding your liabilities.
Knowing how to file a small business taxes will be substantially easier if you are preparing year-round for this task. Organized accounting records are essential for filing small business taxes for the first time, and every time for that matter.
You need to track all your business’s transactions every day. You can use online accounting software to make organizing accounting records simple. Your financial records will help back up figures reported on your business tax return. Using software to stay organized could reduce the hours your accountant has to bill, and could significantly reduce your small business tax preparation cost.
Business structures and taxes
When you start your company, you must choose a business structure. Business structures have different tax liabilities, so it’s important to pick the one that’s right for your business.
Some types of business structures hold the owner personally responsible for company taxes. Other structures separate the business’s tax liabilities from the owner’s. And, each business structure requires a different IRS form. Learning how to file taxes for small business might look a little different in each case.
A sole proprietorship is a single-owner business structure. It’s the easiest way to structure a company. And, sole proprietorships have the smallest number of government regulations.
The owner, called the sole proprietor, is considered the same legal entity as the business. If the business cannot pay its tax debt, the sole proprietor’s personal assets could be at risk.
IRS forms needed:
Schedule C, Profit or Loss From Business
Sole proprietor’s use Schedule C to report income and expenses to the IRS. Schedule C is a section of Form 1040.
Schedule SE, Self-Employment Tax
If you are self-employed, use Schedule SE to calculate money owed in self-employment taxes. File the Schedule SE self-employment tax form if you are self-employed and earned $400 or more in the year.
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A partnership has two or more owners. Partners share profits and losses equally unless otherwise stated in a partnership agreement.
Like a sole proprietorship, a partnership is only taxed at the personal income level. If the business cannot pay its tax liabilities, the owners’ personal assets could be at stake.
IRS form needed:
Form 1065, US Return of Partnership Income
Partnerships do not pay federal income taxes. Form 1065 is simply used to report business income and expenses to the IRS.
The company sends Form 1065 Schedule K-1 to each partner, showing each person’s share of income and losses. Partners use Schedule K-1 to fill out their personal income tax returns.
A corporation, also called a C Corp, is a separate entity from the owners. As an independent entity, owners are not personally responsible for the business entity tax debt.
While the owners’ personal assets are protected, corporations are double-taxed. The company’s income is first taxed at the business level. Then, each owner’s personal income is taxed.
IRS form needed:
Form 1120, US Corporation Income Tax Return
You use Form 1120 to calculate and return the business’s federal income taxes. You also use this form to report the corporation’s income and expenses.
Limited liability company (LLC)
A limited liability company combines parts of corporations and partnerships. Like a corporation, an LLC and the owners are separate legal entities. And like a partnership, the owners have shared tax liabilities.
LLCs limit the amount of each owner’s personal tax liability. Taxes pass through to the personal income level, so the business is not double-taxed. Depending on the way the owners set up the LLC, the company will file as a corporation, partnership, or as part of the owners’ tax returns.
Tax deductible expenses
If you’re new to filing taxes for small business, you may not know that some business expenses are tax deductible. That means you can subtract part or all of the cost from your total taxes owed.
In an SBA article, Caron Beesley, a small business owner, writer, and marketing communications consultant, says:
Petty cash purchases, magazine subscriptions, educational classes and more. These ‘small’ expenses can add up quickly. Make sure you track all your expenses and check with your tax advisor about what you can and cannot deduct.
To claim small business tax deductions, you need accurate accounting records. You must be able to prove that you bought an item for business use, not personal. Here are five common tax deductions for small businesses:
Home office deduction
You can deduct the parts of your home that you use to conduct business. With the home office deductionyou can only claim the portions of your home that you use exclusively for business operations.
Business use of a vehicle deduction
You can claim the use of your vehicle when you use it for business purposes. You can’t claim your expenses related to your commute between home and your business. Also, you can’t deduct parking fees or traffic tickets received during working hours.
Travel cost deduction
You can write off travel costs for business trips. The travel costs must be ordinary, necessary and reasonable for your business. You can’t deduct travel expenses made for personal vacations.
Employee expense deduction
If you have employees, some of your payroll expenses might be deductible. You can write off employee wages and contributions to employee benefits. There are certain rules you must follow to claim the employee expense deduction.
Legal and professional fee deduction
If you paid legal or professional fees, you might be able to deduct them. The fees must have been ordinary, necessary, and directly related to your company.
First time filing taxes for small business
When you file taxes for the first time, carefully follow the instructions on the tax form. Make sure you fill out all the information correctly. Mistakes on tax forms could lead to an IRS penalty, fine, or audit.
Send the form to the appropriate government agency. Instructions on where and how to send the document will be located on the form. Send the form before its deadline.
Remember, this article focuses on federal business tax liabilities. You will also need to file taxes for your state, and possibly your locality. Check with your state and local business agencies to see which tax forms to file.
Tracking income and expenses is a critical part of filing business taxes. For a simple solution to your small business books, try Patriot’s online accounting software. Try it for free today!
This article has been updated from its original publication date of September 8, 2016.
This is not intended as legal advice; for more information, please click here.